M&A outlook for banking in 2025: KPMG interview

Expected Fed interest rate cuts should lower deal financing costs and boost M&A image credit shutterstock

KPMG’s latest report on M&A in the Financial Services industry: Measured Momentum,  reviews M&A data in each of the banking, capital markets, and insurance sectors. In addition, it offers a deep dive into Basel III Endgame, and an outlook for M&A in the financial services industry.

Peter Torrente, US head of Banking and Capital Markets at KPMG tells RBI that there is cause for cautious optimism as regards dealmaking in 2025.

Despite mixed results in Q3, with deal volume rising but value falling compared to Q2, year-to-date mergers and acquisitions (M&A) activity remains favourable. The re-proposed US Basel III Endgame (B3E) regulatory regime is expected to significantly ease banks’ capital burdens compared to the previous proposal. The new version would require banks to raise less additional capital overall and increases the asset threshold for compliance. This is expected to compel more banks to pursue M&A as buyers or sellers, especially those with assets between $100-700bn. While the re-proposal may still undergo revisions, it is a net positive for banking M&A activity.

Key trends and insights – KPMG on M&A in Q3 2024

• Four of the top eight deals were in insurance, including major acquisitions by Marsh & McLennan and a private equity (PE) consortium.
• Expected Fed interest rate cuts should lower deal financing costs and boost M&A, particularly for PE firms eager to deploy capital.
• However, factors such as regulatory uncertainty, economic concerns, and geopolitical risks are tempering optimism.
• Banking and insurance M&A is expected to remain relatively subdued in the near-term.
• Capital markets M&A activity depends on overall dealmaking appetite improving from current muted levels.

2025 outlook positive, pro-business, hope for less regulation

“I’d say the US banking industry ended 2024 on a positive note with really strong fourth quarter earnings, and bank stock valuations up coming into 2025. The outlook for 2025 was positive, pro-business and with the hope of lesser regulation,” Torrente tells RBI.

But what of the US election result and the resultant regulatory uncertainty?

“I think all tailwinds for the industry coming into the year over the last six, eight weeks, have definitely damped down a bit on the M and A front again.”

Torrente rightly highlights the strong arguments in favour of bank consolidation. Moreover, there is hope in sight that the never-ending saga of revising Basel III will bear fruit

“I think everyone is looking for a little bit more certainty in the environment to be an accelerator for the deal environment. As bank management teams and boards look at pricing deals, there needs to be an understanding of what the regulatory regime is going to be. Particularly with Basel III end game, what the capital and liquidity requirements are going to be in order to in order to move ahead.

Torrente says that local, regional and super-regional bank segments have reasons for doing deals, although there are different reasons within the segments for the need to consolidate.

The super-regional banks, for example, are looking to take advantage of expanding product sets and expand to different geographies within the US. The smaller regional and community banks have a need to target economies of scale and invest in the latest technologies if they are to prosper.

Enhanced preparation ahead of potential deals

Encouragingly, Torrente says there is evidence that potential acquiring banks are strengthening their M and A capabilities and have been doing so now for a number of years.

“We definitely see bank management teams and boards strategising as they put their strategies together for organic and inorganic growth. They are certainly making sure they’re ready, should deals begin to happen.

“We see banks not only looking at sort of the traditional areas of due diligence, looking at the financials, looking at credit portfolios, the regulatory posture and position. But they are also looking deeper into data and data governance, into third party risk, into technology, the IT systems, and the AI capabilities as they look at doing due diligence. So definitely, as we’re interacting with our clients,  we are seeing enhanced preparation for potential deals.

“I am still very optimistic about consolidation and the need to consolidate for scale, for investment in technology, expanding geographical footprints and products. That’s still there, and I think we will see more deal activity. It might take a little bit longer than maybe people thought coming into the year. But in a recent survey we did, 79% of the executives believe that the deal environment will be there in an accelerated way, in 2025.”

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